Farmers warned over new bank lending conditions

Watch out for banks imposing strict new requirements on farm borrowing arrangements, warn advisers.

Special care should be taken when renegotiating loans as new terms could include covenants to ensure minimum business performance, said Mike Butler, director of rural services at accountant Old Mill.

“Many of our farming clients are being asked to review their account facilities, and are suddenly finding that their bank is imposing new terms and conditions.”

Deals were increasingly being referred to credit policy teams, rather than relying on agricultural managers, he said. In some cases the customer’s failure to check the conditions meant that they were often not aware that new terms had been imposed.

“Banks are losing the personal touch with their farming clients, and, as a result, their offers are often full of caveats, and hence inappropriate,” said Mr Butler. “Perhaps most worryingly, many agreements are coming back with new terms added, which introduce performance covenants on the borrower.”

These may require a minimum amount of profit to be paid back to the bank, or for dividends to be authorised by the bank before they are distributed, for example. “This puts a severe restriction on a client’s freedom to run their own business, and few farmers would be willing to accept that sort of interference,” he said.

Farmers should check their bank paperwork to see if such restrictions exist and refer to their accountant and lawyer if at all unsure, he advised, as these covenants may make it impossible to carry out the usual annual strategic tax planning that farmers undertake.

For example, in some years farmers may want to defer the sale of a crop from one accounting period to the next – or bring forward repair expenditure to minimise taxable profits. But in reducing their income tax liability they could breach the bank’s covenants.

“The last thing one wants to do is save significant amounts of tax, only to find that the overdraft or loan facility is withdrawn – that would be catastrophic for farming businesses,” said Mr Butler.

“Even if the loan is not completely withdrawn, there is a serious concern that banks may use a breach of covenant as a reason to renegotiate a client’s lending rate – potentially declaring them higher risk and thereby increasing their charges.”

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